Even if you neglected to save by your 50th birthday, it’s not too late to start. Stephanie Hawthorne explores your financial options
Of the 2.1 million 50-64 year olds who left their last job in the past eight years, only 38 percent have retired: 20 percent for health reasons, 9 percent for family care and 15 percent have been laid off, according to the ONS -Data dismissed or dismissed. In today’s world, you need to prepare for any eventuality.
US President Joe Biden has one of the most demanding jobs in the world at 78, while naturalist and broadcaster Sir David Attenborough and the Queen are still working at 94. Long gone are the days of 40 years in the same job, retiring at 65 with a carriage watch and a nice fat final pension.
Alistair McQueen, head of savings and pensions at UK insurer Aviva, summarizes the new normal as “more and more of us live fluid lives, with education, work and non-work becoming increasingly important throughout our lives.”
At 50, the countdown to retirement begins with a vengeance. If you’ve been neglecting to save up to now, it’s not too late to start. Even a final decade of saving or working longer can make a real difference to your financial well-being.
Retirement is no longer a block of 25 to 35 years. Sarah Coles, personal finance analyst at DIY investment platform Hargreaves Lansdown, advises: “In the early years you might want to keep working, and when you stop you might want to make sure you have a guaranteed income or care needs.”
The government-backed Money Advisory Service, Pension Wise and The Pensions Advisory Service, as well as your bank or pension provider, offer a wide range of free assistance.
Still, retiring on a fraction of your salary sounds alarming, especially as the new state pension, available from age 66 and costing just £175.20 a week, is one of the worst in the developed world. The amount you receive depends on your social security record and can be significantly less. You can get a forecast of your state pension here.
It’s also worth tracking down any previous jobs you’ve had, as you might find a missing pension that you’d forgotten about altogether. Almost £20 billion in pension funds are unclaimed, according to the Association of British Insurers. Lost company pensions can be tracked here.
Once you’ve got all your paperwork together, Tom Selby, a senior analyst at DIY investment platform AJ Bell, advises “consolidating your pensions with a single provider as it can lower your costs and simplify administration.”
He adds: “Be careful not to lose any valuable guarantees – talk to your provider before you transfer and they should be able to tell you whether or not it’s a risk.”
If you have a private pension fund, Kay Ingram, director of public policy at the national independent financial advisor LEBC Group, notes, “The provider needs to take you into your 50s as income and compare that to offers from other providers.”
You do not have to accept the income opportunities offered by the provider. Shopping in the area offers better and cheaper alternatives.
As of February 2021, the over-55s have a choice of four investment paths to invest the remaining money, which Ingram says “should lead to appropriate investments based on your plans for the next five years.”
Alternatively, she adds, you can stay invested in the same fund you were previously in or choose a different one. It is also possible to move the money in the pension pot to another pension plan.
You can’t access your pension in cash until age 55, but the longer you leave it untouched, the bigger your pot is likely to be. At 55, you have several options, a guaranteed lifetime income called an annuity, or you can take up to 25 percent of your pension pot as a tax-free lump sum and use the rest to buy an annuity (a good idea for essential expenses).
There’s also a flexible approach where you can take up to 25 percent of your pension pot as a tax-free capital amount and leave the rest invested to earn direct income when you need it. You can also take some or all of the amount as a cash allowance – up to 25 percent of any amount you take is tax-free, the rest is subject to income tax at your marginal rate, or you can leave it at that and decide at a later date. You can also combine all of these options.
For people paying out of their pension, Ingram advises that “a payout rate of around 3 percent net of tax would make sense when invested in a wide range of stocks and fixed income investments” to avoid depleting their capital.
Keep a healthy cash reserve for emergencies and expenses for a year or two to avoid selling investments during a market downturn.
If you really can’t take any risk, an annuity might be your best option, but interest rates have been in the doldrums for a decade.
Steve Webb, former Pensions Secretary and partner at actuaries Lane Clark & Peacock, says: “A good rule of thumb is that for every £1,000 in your pension pot you will get £1 a week in retirement; This is equivalent to saying that at age 65 a typical retirement rate is around 5 percent.”
Be sure to tell your insurer about any underlying health issues and look for the best rate because once you’ve bought an annuity, there’s no turning back. Prices improve as you get older.
A word of warning, if you think you might return to work, there might be an uncomfortable twinge in the tail. Ian Brown, pensions expert at international provider Quilter, warns: “While you can get tax relief on pension contributions of up to £40,000 a year, or 100 per cent of your taxable salary, the Annual Money Purchase Allowance (MPAA) means you’re running out of money once you start earning With a defined contribution pension system, the amount you can put into a pension and still get a tax break is significantly reduced.”
There is another option – equity release, where you unlock the value of your home without selling it. Always seek legal and financial advice as this is a minefield.
Selby warns, “When interest rates go up, the debt can grow much faster than you expect. Even with a competitive interest rate of 3.5 percent, the debt will double in 20 years.”
It will also dent any inheritance, so be sure to talk to your children before making a decision. The money you free could end eligibility for any means-tested government benefits like pension credits and council tax benefits you receive. It can also sometimes affect your ability to move home.
In the final years of life, a select few – including 288,000 people with dementia – require residential care which can cost up to £30,000 a year, although local authorities sometimes pay these fees.